Deutsche Bank AG (USA) (NYSE:DB) has come out with its top fixed income trading ideas spanning all regions, amidst enhanced policy uncertainties.
With fixed income experiencing the first bear market in more than a decade, Deutsche Bank’s research team has adopted a bottom-up approach to investing and has come out with their top fixed income trading ides for the fourth quarter.
Pay USD 1Y2Y Vs. EUR
Deutsche Bank AG (USA) (NYSE:DB) analysts feel in the U.S., the market is currently pricing a more benign normalization of interest rates than the FOMC is signaling. Besides this, the analysts anticipate the cyclical recovery in Europe should persist, though it clearly lags the U.S.
Though the Fed rate path is extremely benign, the possibility of another LTRO in Europe should be mildly bullish on the very front-end.
Deutsche Bank AG (USA) (NYSE:DB) analysts feel the differential 1Y2Y rate between the U.S. and the Eurozone is trading at particularly tight levels, and hence they recommend paying USD 1Y2Y rate as against Europe, for a target of 35bp.
Deutsche Bank AG (USA) (NYSE:DB) analysts observe the USD 5Y-10Y curve is at historically steep levels, aided by a very dovish Fed, in the context of improving data. As the USD curve should bear flatten in a large sell-off, Deutsche analysts recommend zero cost USD 5Y-10Y ATM +50bp bear flatteners.
Mortgage Backed Securities
Assuming rates stand still and the MBS still beat the Treasury blend, even if rates rise or fall by 50 bp, Deutsche Bank analysts recommend selling a 5.5-year-duration blend of 2- and 10-year Treasury debt and buying TBA Fannie Mae 30-year 4.0 percent pass-throughs. The analysts feel this trade offers a projected 64 bp of extra return above Treasuries over the next six months.
In MBS derivatives, the analysts recommend buying IOS 3.0 percent 2012 contracts, hedging with TBA Fannie Mae 30-year 4.0 percent pass-throughs.
Turning their focus towards Spanish market, Deutsche Bank analysts recommend 2004-2006 vintage senior Spanish RMBS bonds where yield pick-up to Spanish sovereign bonds and cedulas is significant. Besides this, the analysts feel principal investment risk is highly remote and tender optionality exists.
JGB Yields To Decline
Deutsche Bank AG (USA) (NYSE:DB) analysts anticipate JGB yields to decline gradually towards the end of 2013, as supply/demand conditions remain generally benign. Hence the analysts feel 7Y10Y flattener looks attractive carry trade, thanks to favorable supply/demand dynamics.
Turning their focus in identifying relative value and volatility opportunities, the analysts anticipate 10-year GBP asset swaps to widen on improving UK public finances and relative cheapness on a cross-market basis.
F-Income ideas by Deutsche Bank
Some of the other fixed income ideas identified by Deutsche Bank analysts include: buying short-dated 2-year bonds, selling longer-tenor AUD volatility, paying 5y5y rates in NOK Vs SEK, as the analysts feel bond risk premia are too low in Norway as against Sweden.